In 1981, the Department of Pension & Pensioners’ Welfare of India launched a pension scheme called Commutation of Pension. So, what is Commuted Pension Meaning? Well, it refers to a lump sum partial withdrawal of a portion of the pension amount by a government employee at their retirement.
We exercise this option instead of our upcoming periodic pension payments that they are eligible to receive after their retirement. Thus, if we choose to exercise this completely voluntary option, we receive reduced monthly pension amounts for the next 15 years from the date of such receipt.
How is Commuted Value of Pension Calculated?
After knowing the meaning of Commuted Pension Meaning, let’s understand how is it calculated. First, the lump-sum amount is calculated with the help of a commutation table. Then, the pension commuted gets deducted from the due monthly pension amounts. However, the government continues to calculate and provide the Dearness Allowance basis of the original pension amount, i.e., the actual pension amount, without any deduction for the commuted portion.
The formula for Calculating Commuted Value of Pension
CVP = 40% * Commutation factor * 12
The Commutation factor concerns the pensioner’s age on their next birthday on the date when commutation will become absolute as per the new table according to the
Commutation of Pension Rules
However, from July 01, 2021, Pension Commuted Values as per New Rules will be applicable. As a result, we can take home 1/3rd of our total pension amount, and the remaining amount will be reserved for monthly pension payouts.
- Commuted Value of Pension is the amount of lump sum money that we can withdraw from our total pension amount as a pensioner.
- The value of the amount of commuted pension depends on the life expectancy of the pensioner.
- The option to exercise Commutation of Pension is completely voluntary at the hands of the pensioner.
- If we commute our pension early, it might help us with some tax liabilities.
What are the Benefits of Commutation of Pension?
These are the benefits that we receive in Commutation of Pension, which is mentioned below-
- Commutation of Pension helps meet any necessity of funds without requiring us to resort to a loan or any other form of borrowed funds.
- We can withdraw these funds to meet our hefty expenses requirements, such as purchasing a house, children’s education/marriage, or a good travel plan post-retirement.
- The availability of the option to commute the pension gives us peace of mind that we can receive a lump sum amount from our retirement benefits if any such requirement arises in the future.
- The commutation of pension option also provides us with an opportunity to invest the lump sum amount in a lucrative investment scheme and create more wealth for our retirement.
Rate of Interest of Commutation of Pension
The rate of interest on commutation of pension released by the Government of India stands at 4.75% for those of us who retired before January 01, 2013. However, the interest rate on commutation of pension is 8% if we take retirement after January 01, 2013.
All About Commutation of Pension Rules
There are various Rules for Commutation of Pension which we need to know about. Below, we have listed all important Pension Commutation Rules for your reference –
We need to submit the claims request form for commutation of pension at least six months before our retirement to our organisation’s head office to receive the Pension Payment Order (PPO) before our retirement date. The processing of claims and verifications takes a lot of time, so we have to keep this deadline in mind to receive the lump sum amount in due time.
Verification of PPO
After receiving the PPO, we must verify that all the details mentioned are correct. In case of any error or discrepancy, we must reach out to our company’s head office as soon as possible and get the error rectified.
Children with Physical/ Mental Disabilities
In case any children of a pensioner have any physical or mental disability, the same should be notified to the company’s head office so the organisation can make an endorsement for the child/children in our pension records. We must remember to obtain an acknowledgement of the endorsement from the head office.
Pension Account Transfer
If we wish to transfer our pension account to a different Pension Disbursing Agency (PDA), we must make an application stating the transfer request to our current paying agency.
Restoration of Pension
Any pension that we get commuted is supposed to be restored after completion of 15 years from the date on which we receive our commuted pension. However, if the restoration is not completed in time, we must reach out to either our bank responsible for crediting the pension or the paying agency.
Loss of PPO
If we lose our PPO, we must immediately notify the Pension Disbursing Agency and request them to issue a lost certificate to get a duplicate copy of the PPO.
For those of us who are Non-Resident Indian (NRI) Pensioners, it is required that we open an NRI bank account and submit the required documents, including the nationality certificate, to receive the commuted pension.
Medical Examination Requirement for Commutation of Pension
Following categories of pensioners who can commute a portion of their pension only after their medical examination and when they are declared fit by the medical authority –
- Pensioners retired on invalidation.
- Those who have been retired compulsorily based on the penalty.
- Those who will receive an allowance for compensation.
- Those who have applied for commutation of pension after one year of their retirement.
Taxation Applicable Under Commutation of Pension
Just like an uncommuted pension, commuted pension is also fully exempt from tax for government employees. However, for non-government employees, who also receive a gratuity with the commuted pension amount, only 1/3rd of the commuted pension amount is exempt from tax. The remaining 2/3rd attracts tax treatment as per their salary. But, for non-government employees who do not receive a gratuity, 50% of the commuted pension is exempt from tax, and only the remaining 50% attracts taxation.
Did You Know?
According to the Ministry of Labour, the provision of the restoration benefit after 15 years of receipt of commutation pension is expected to benefit 6,30,000 pensioners.
Words to Remember
Life Expectancy – Life expectancy is the age at which a person is statistically expected to live based on the actuarial data.
Commutation of Pension is a partial withdrawal facility provided to us by the Central Government. As per current rules, we can commute up to 40% of our pension. However, from July 01, 2022, we would be able to take only ⅓ rd of the pension amount in advance. This facility offered by the government allows us to meet our long-term expenses, which may require a hefty upfront payment.
We can download the forms from the Department of Pensions and Pensioners Welfare website.
The Head of Office in the Ministry where a government servant last worked is the pension sanctioning authority.
As government employees, we are entitled to commute for a lump sum payment of up to 40 per cent of the total pension amount according to the current rules. However, from July 01, 2022, onwards, we can receive a maximum of 33.33% of our pension as a lump sum.
No, it is not at all compulsory to commute one’s pension. We can opt for our voluntary partial withdrawal as per our requirements and preferences.
Whether we need to file an Income Tax Return (ITR) depends totally on the income tax slab in which we fall and is independent of whether the income has been received by way of pension or salary, or any other mode.
Also read about Widow Pension Scheme on Investment Simplified.